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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017

OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___.

Commission file number: 1-7908
ADAMS RESOURCES & ENERGY, INC.
(Exact name of Registrant as Specified in Its Charter)
DELAWARE
74-1753147
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
 
 
17 SOUTH BRIAR HOLLOW LANE, SUITE 100, HOUSTON, TEXAS 77027
 
 
(Address of Principal Executive Offices) (Zip Code)
 
 
 
 
 
(713) 881-3600
 
 
(Registrant’s Telephone Number, Including Area Code)
 

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange On Which Registered
Common Stock, $0.10 Par Value
NYSE MKT

Securities to be registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the company’s voting and non-voting common shares held by non-affiliates as of the close of business on June 30, 2017 was $88,123,994 based on the closing price of $41.08 per one share of common stock as reported on the NYSE MKT for such date. There were 4,217,596 shares of Common Stock outstanding at March 1, 2018.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held May 8, 2018 are incorporated by reference into Part III of this report.


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ADAMS RESOURCES & ENERGY, INC.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This annual report on Form 10-K for the year ended December 31, 2017 (our “annual report”) contains various forward-looking statements and information that are based on our beliefs, as well as assumptions made by us and information currently available to us. When used in this document, words such as “anticipate,” “project,” “expect,” “plan,” “seek,” “goal,” “estimate,” “forecast,” “intend,” “could,” “should,” “would,” “will,” “believe,” “may,” “potential” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements. Although we believe that our expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that such expectations will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions as described in more detail under Part I, Item 1A of this annual report. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. You should not put undue reliance on any forward-looking statements. The forward-looking statements in this annual report speak only as of the date hereof. Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason.

PART I

Items 1 and 2. Business and Properties.

General

Adams Resources & Energy, Inc. (“AE”) is a publicly traded Delaware corporation organized in 1973, the common shares of which are listed on the NYSE MKT LLC (“NYSE MKT”) under the ticker symbol “AE”. We and our subsidiaries are primarily engaged in the business of crude oil marketing, transportation and storage in various crude oil and natural gas basins in the lower 48 states of the United States (“U.S.”). We also conduct tank truck transportation of liquid chemicals and dry bulk and ISO tank container storage and transportation primarily in the lower 48 states of the U.S. with deliveries into Canada and Mexico, and with terminals in the Gulf Coast region of the U.S. Our headquarters are located in 27,932 square feet of office space located at 17 South Briar Hollow Lane, Suite 100, Houston, Texas 77027, and the telephone number of that address is (713) 881-3600. Unless the context requires otherwise, references to “we,” “us,” “our,” the “Company” or “AE” are intended to mean the business and operations of Adams Resources & Energy, Inc. and its consolidated subsidiaries.

Historically, we have operated and reported in three business segments: (i) crude oil marketing, transportation and storage, (ii) tank truck transportation of liquid chemicals and dry bulk and ISO tank container storage and transportation, and (iii) upstream crude oil and natural gas exploration and production. We exited the upstream crude oil and natural gas exploration and production business during 2017 with the sale of our upstream crude oil and natural gas exploration and production assets.

For detailed financial information regarding our business segments, see Note 8 in the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.

2017 Developments

Subsidiary Bankruptcy, Deconsolidation and Sale

On April 21, 2017, one of our wholly owned subsidiaries, Adams Resources Exploration Corporation (“AREC”), filed a voluntary petition in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”), Case No. 17-10866 (KG). AREC operated its business and managed its properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and order of the Bankruptcy Court. AE was the primary creditor in the Chapter 11 process.

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During the second quarter of 2017, we recorded a non-cash charge of approximately $1.6 million associated with the deconsolidation of AREC, which reflected the excess of the net assets of AREC over its estimated fair value based on an expected sales transaction price of approximately $5.0 million, net of estimated transaction costs. During the third quarter of 2017, Bankruptcy Court approval was obtained on three asset purchase and sales agreements with three unaffiliated parties, and AREC closed on the sales of substantially all of its assets.

In October 2017, AREC submitted its liquidation plan to the Bankruptcy Court for approval. In connection with the sales of these assets and submission of the liquidation plan, we recognized an additional loss of $1.9 million during the third quarter of 2017, which represents the difference between the proceeds we expect to be paid upon settlement of the bankruptcy, net of anticipated remaining closing costs identified as part of the liquidation plan, and the book value of our cost method investment. In December 2017, we received proceeds of approximately $2.8 million from AREC related to the settlement of a portion of the bankruptcy process. We obtained approval of a confirmed plan in December 2017, and we expect the case to be dismissed during the first half of 2018. We anticipate receiving an additional $0.4 million in 2018 when the bankruptcy case is dismissed.

In connection with the bankruptcy filing, AREC entered into a Debtor in Possession Credit and Security Agreement (“DIP Credit Agreement”) with AE dated as of April 25, 2017, in an aggregate amount of up to $1.25 million. AREC borrowed approximately $0.4 million under the DIP Credit Agreement, and the amount was repaid during the third quarter of 2017 with proceeds from the sales of the assets. See Note 3 in the Notes to Consolidated Financial Statements for further information.

Voluntary Early Retirement Program

In August 2017, we implemented a voluntary early retirement program for certain employees, which resulted in an increase in personnel expenses of approximately $1.4 million. Of this amount, approximately $1.0 million was included in general and administrative expenses and $0.4 million was included in operating expenses.

Impairment of Investment in Unconsolidated Affiliate

During the third quarter of 2017, we completed a review of our investment in VestaCare, Inc. (“VestaCare”) and determined that there was an other than temporary impairment as the current projected operating results of VestaCare did not support the carrying value of our investment. As such, we recognized a pre-tax impairment charge of $2.5 million during the third quarter of 2017 related to our investment in VestaCare. See Note 7 in the Notes to Consolidated Financial Statements for further information.
     
  
Business Segments

Marketing

Our marketing segment consists of the operations of our wholly owned subsidiary, Gulfmark Energy, Inc. (“Gulfmark”). Our crude oil marketing activities generate revenue from the sale and delivery of crude oil purchased either directly from producers or from others on the open market. We purchase crude oil and arrange sales and deliveries to refiners and other customers, primarily onshore in Texas, Oklahoma, North Dakota, Michigan and Louisiana. Our marketing activities includes a fleet of approximately 144 tractor-trailer rigs, the majority of which we own and operate, used to transport crude oil. We also maintain over 164 pipeline inventory locations or injection stations. We have the ability to barge crude oil from four crude oil storage facilities along the Intercoastal Waterway of Texas and Louisiana, and we maintain approximately 425,000 barrels of storage capacity at the dock facilities in order to access waterborne markets for our products.

    

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The following table shows the age of our owned and leased tractors and trailers within our marketing segment at December 31, 2017:
 
Tractors (1)
 
Trailers
 
 
 
 
Model Year:
 
 
 
2018
16

 

2017
4

 

2015
19

 
3

2014
39

 
23

2013
59

 
41

2012
7

 
14

2011

 
75

2008 and earlier

 
45

Total
144

 
201

____________________
(1)
Includes 15 tractors that we lease from a third party under a capital lease agreement. See Note 13 in the Notes to Consolidated Financial Statements for further information.

We purchase crude oil at the field (wellhead) level. Volume and price information were as follows for the periods indicated:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Field level purchase volumes – per day (1)
 
 
 
 
 
Crude oil – barrels
67,447

 
72,900

 
106,400

 
 
 
 
 
 
Average purchase price
 
 
 
 
 
Crude oil – per barrel
$49.88
 
$39.30
 
$45.41
____________________
(1)
Reflects the volume purchased from third parties at the field level of operations.

Field level purchase volumes depict our day-to-day operations of acquiring crude oil at the wellhead, transporting crude oil, and delivering it to market sales points. We held crude oil inventory at a weighted average composite price as follows at the dates indicated (in barrels):
 
December 31,
 
2017
 
2016
 
2015
 
 
 
Average
 
 
 
Average
 
 
 
Average
 
Barrels
 
Price
 
Barrels
 
Price
 
Barrels
 
Price
 
 
 
 
 
 
 
 
 
 
 
 
Crude oil inventory
198,011

 
$61.57
 
255,146

 
$51.22
 
261,718

 
$29.31

We deliver physical supplies to refinery customers or enter into commodity exchange transactions from time to time to protect from a decline in inventory valuation. During the year ended December 31, 2017, we had sales to four customers that comprised 22.8 percent, 17.1 percent, 10.8 percent and 10.7 percent, respectively, of total consolidated revenues. We believe alternative market outlets for our commodity sales are readily available and a loss of any of these customers would not have a material adverse effect on our operations. See Note 14 in the Notes to Consolidated Financial Statements for further information regarding credit risk.

    

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Operating results for our marketing segment are sensitive to a number of factors. These factors include commodity location, grades of product, individual customer demand for grades or location of product, localized market price structures, availability of transportation facilities, actual delivery volumes that vary from expected quantities, and the timing and costs to deliver the commodity to the customer.

Transportation

Our transportation segment consists of the operations of our wholly owned subsidiary, Service Transport Company (“STC”). STC transports liquid chemicals and, to a lesser extent, dry bulk on a “for hire” basis throughout the continental U.S., Canada and into Mexico. STC also provides ISO tank container storage and transportation for customers. Transportation services are provided to customers under multiple load contracts in addition to loads covered under STC’s standard price list.
    
The following table shows the age of our owned and leased tractors and trailers within our transportation segment at December 31, 2017:
 
Tractors (1)
 
Trailers
 
 
 
 
Model Year:
 
 
 
2016
30

 
52

2015
38

 
30

2014
1

 
35

2013
102

 

2012
70

 
30

2011
3

 

2008 and earlier

 
384

Total
244

 
531

____________________
(1)
Excludes 35 independent contractor tractors.

Miles traveled was as follows for the periods indicated (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Mileage
21,835

 
22,611

 
25,205


STC also operates truck terminals in Houston, Corpus Christi, and Nederland, Texas, and Baton Rouge (St. Gabriel), Louisiana, St. Rose, Louisiana and Mobile (Saraland), Alabama. Transportation operations are headquartered at a terminal facility situated on 26.5 acres that we own in Houston, Texas. This property includes maintenance facilities, an office building, tank wash rack facilities and a water treatment system. The St. Gabriel, Louisiana terminal is situated on 11.5 acres that we own and includes an office building, maintenance bays and tank cleaning facilities. Pursuant to regulatory requirements, STC holds a Hazardous Materials Certificate of Registration issued by the U.S. Department of Transportation (“DOT”).

STC is a recognized certified partner with the American Chemistry Council’s Responsible Care Management System (“RCMS”); the scope of this RCMS certification covers the carriage of bulk liquids throughout STC’s area of operations as well as the tank trailer cleaning facilities and equipment maintenance.  STC’s quality management process is one of its major assets.  The practice of using statistical process control covering safety, on-time performance and customer satisfaction aids continuous improvement in all areas of quality service.   The American Chemistry Responsible Care Partners serve the chemical industry and implement and monitor the seven Codes of Management Practices.  The seven codes address compliance and continuing improvement in (1) Community Awareness and Emergency Response, (2) Pollution Prevention, (3) Process Safety, (4) Distribution, (5) Employee Health and Safety, (6) Product Stewardship, and (7) Security.

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Investments in Unconsolidated Affiliates

We own an approximate 15 percent equity interest (less than 3 percent voting interest) in VestaCare, Inc., a California corporation (“VestaCare”), through Adams Resources Medical Management, Inc. (“ARMM”), a wholly owned subsidiary. We acquired our interest in VestaCare in April 2016 for a $2.5 million cash payment, which we impaired during the third quarter of 2017. VestaCare provides an array of software as a service (SaaS) electronic payment technologies to medical providers, payers and patients including VestaCare’s most recent product offering, VestaPay™. VestaPay™ allows medical care providers to structure fully automated and dynamically updating electronic payment plans for their patients. We do not currently have any plans to pursue additional medical-related investments. See Note 7 in the Notes to Consolidated Financial Statements for further information.

Competition

In all phases of our operations, we encounter strong competition from a number of entities. Many of these competitors possess financial resources substantially in excess of ours. We face competition principally in establishing trade credit, pricing of available materials and quality of service. Our marketing division competes with major crude oil companies and other large industrial concerns that own or control significant refining, midstream and marketing facilities. These major crude oil companies may offer their products to others on more favorable terms than those available to us.

Seasonality

In the trucking industry, revenue has historically followed a seasonal pattern for various commodities and customer businesses. Peak freight demand has historically occurred in the months of September, October and November. After the December holiday season and during the remaining winter months, freight volumes are typically lower as many customers reduce shipment levels. Operating expenses have historically been higher in the winter months primarily due to decreased fuel efficiency, increased cold weather-related maintenance costs of revenue equipment, and increased insurance claim costs attributable to adverse winter weather conditions. Revenue can also be impacted by weather, holidays and the number of business days that occur during a given period, as revenue is directly related to the available working days of shippers.

Although our marketing business is not materially affected by seasonality, certain aspects of our operations are impacted by seasonal changes, such as tropical weather conditions, energy demand in connection with heating and cooling requirements and the summer driving season.


Regulatory Matters

We are subject to an extensive variety of evolving federal, state and local laws, rules and regulations governing the storage, transportation, manufacture, use, discharge, release and disposal of product and contaminants into the environment, or otherwise relating to the protection of the environment. Below is a non-exclusive listing of the environmental laws that potentially impact our activities.

The Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, as amended.
The Clean Water Act of 1972, as amended.
The Clean Air Act of 1970, as amended.
The Toxic Substances Control Act of 1976, as amended.
The Emergency Planning and Community Right-to-Know Act.
The Occupational Safety and Health Act of 1970, as amended.
Texas Clean Air Act.
Texas Solid Waste Disposal Act.
Texas Water Code.
Texas Oil Spill Prevention and Response Act of 1991, as amended.

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Railroad Commission of Texas (“RRC”)

The RRC regulates, among other things, the drilling and operation of crude oil and natural gas wells, the operation of crude oil and natural gas pipelines, the disposal of crude oil and natural gas production wastes, and certain storage of crude oil and natural gas. RRC regulations govern the generation, management and disposal of waste from these crude oil and natural gas operations and provide for the cleanup of contamination from crude oil and natural gas operations.

Louisiana Office of Conservation

The Louisiana Office of Conservation has primary statutory responsibility for regulation and conservation of crude oil, natural gas, and other natural resources in the State of Louisiana. Their objectives are to (i) regulate the exploration and production of crude oil, natural gas and other hydrocarbons, (ii) control and allocate energy supplies and distribution thereof, and (iii) protect public safety and the environment from oilfield waste, including the regulation of underground injection and disposal practices.

State and Local Government Regulation

Many states are authorized by the U.S. Environmental Protection Agency (“EPA”) to enforce regulations promulgated under various federal statutes. In addition, there are numerous other state and local authorities that regulate the environment, some of which impose more stringent environmental standards than federal laws and regulations. The penalties for violations of state law vary, but typically include injunctive relief and recovery of damages for injury to air, water or property as well as fines for non-compliance.

Trucking Activities

Our marketing and transportation businesses operate truck fleets pursuant to the authority of the DOT and various state authorities. Trucking operations must be conducted in accordance with various laws relating to pollution and environmental control as well as safety requirements prescribed by states and by the DOT. Matters such as weight and dimension of equipment are also subject to federal and state regulations. These regulations also require mandatory drug testing of drivers and require certain tests for alcohol levels in drivers and other safety personnel. The trucking industry is subject to possible regulatory and legislative changes, such as increasingly stringent environmental requirements or limits on vehicle weight and size. Regulatory change may affect the economics of the industry by requiring changes in operating practices or by changing the demand for private and common or contract carrier services or the cost of providing truckload services. In addition, our tank wash facilities are subject to increasingly stringent local, state and federal environmental regulations.

We have implemented security procedures for drivers and terminal facilities. Satellite tracking transponders installed in the power units are used to communicate emergencies to us and to maintain constant information as to the unit’s location. If necessary, our terminal personnel will notify local law enforcement agencies. In addition, we are able to advise a customer of the status and location of their loads. Remote cameras and enhanced lighting coverage in the staging and parking areas have augmented terminal security. We have a focus on safety in the communities in which we operate, including leveraging camera technology to enhance driver behavior and awareness.

Regulatory Status and Potential Environmental Liability

Our operations and facilities are subject to numerous federal, state and local environmental laws and regulations including those described above, as well as associated permitting and licensing requirements. We regard compliance with applicable environmental regulations as a critical component of our overall operation, and devote significant attention to providing quality service and products to our customers, protecting the health and safety of our employees, and protecting our facilities from damage. We believe we have obtained or applied for all permits and approvals required under existing environmental laws and regulations to operate our current business. We are not subject to any pending or threatened environmental litigation or enforcement actions which could materially and adversely affect our business.

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We have, where appropriate, implemented operating procedures at each of our facilities designed to assure compliance with environmental laws and regulation. However, given the nature of our business, we are subject to environmental risks, and the possibility remains that our ownership of our facilities and our operations and activities could result in civil or criminal enforcement and public as well as private actions against us, which may necessitate or generate mandatory cleanup activities, revocation of required permits or licenses, denial of application for future permits, and/or significant fines, penalties or damages, any and all of which could have a material adverse effect on us. See “Item 1A. Risk Factors” for further discussion. At December 31, 2017, we are not aware of any unresolved environmental issues for which additional accounting accruals are necessary.

Employees

At December 31, 2017, we employed 575 persons. None of our employees are represented by a union. We believe our employee relations are satisfactory.

Federal and State Taxation

We are subject to the provisions of the Internal Revenue Code of 1986, as amended (the “Code”). In accordance with the Code, we computed our income tax provision based on a 35 percent tax rate for the year ended December 31, 2017. On December 22, 2017, the Tax Cut and Jobs Act was enacted into law resulting in a reduction in the federal corporate income tax rate from 35 percent to 21 percent for years beginning in 2018. We conduct a significant amount of business within the State of Texas. Texas operations are subject to a one-half percent state tax on its revenues net of cost of goods sold as defined by the state. We believe we are currently in compliance with all federal and state tax regulations.

Available Information

We electronically file certain documents with the U.S. Securities and Exchange Commission (“SEC”). We file annual reports on Form 10-K; quarterly reports on Form 10-Q; and current reports on Form 8-K (as appropriate); along with any related amendments and supplements thereto. You may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information regarding the Public Reference Room by calling the SEC at (800) SEC-0330. In addition, the SEC maintains a website at www.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC.

We also make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, simultaneously with or as soon as reasonably practicable after filing such materials with, or furnishing such materials to, the SEC, and on our website www.adamsresources.com. The information on our website, or information about us on any other website, is not incorporated by reference into this report.


Item 1A. Risk Factors.

An investment in our common stock involves certain risks.  If any of the following key risks were to occur, it could have a material adverse effect on our financial position, results of operations and cash flows.  In any such circumstance and others described below, the trading price of our securities could decline and you could lose part or all of your investment.


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Economic developments could damage our operations and materially reduce our profitability and cash flows.

Potential disruptions in the credit markets and concerns about global economic growth could have a significant adverse impact on global financial markets and commodity prices. These factors could contribute to a decline in our stock price and corresponding market capitalization. If commodity prices experience a period of rapid decline, or a prolonged period of low commodity prices, our future earnings will be reduced. We currently do not have bank debt obligations. If the capital and credit markets experience volatility and the availability of funds become limited, our customers and suppliers may incur increased costs associated with issuing commercial paper and/or other debt instruments and this, in turn, could adversely affect our ability to secure supply and make profitable sales.

General economic conditions could reduce demand for chemical based trucking services.

Customer demand for our products and services is substantially dependent upon the general economic conditions for the U.S., which are cyclical in nature. In particular, demand for liquid chemical truck transportation services is dependent on activity within the petrochemical sector of the U.S. economy. Chemical sector demand typically varies with the housing and auto markets as well as the relative strength of the U.S. dollar to foreign currencies. A relatively strong U.S. dollar exchange rate may be adverse to our transportation operation since it tends to suppress export demand for petrochemicals. Conversely, a weak U.S. dollar exchange rate tends to stimulate export demand for petrochemicals.

Our business is dependent on the ability to obtain trade and other credit.

Our future development and growth depends, in part, on our ability to successfully obtain credit from suppliers and other parties. Trade credit arrangements are relied upon as a significant source of liquidity for capital requirements not satisfied by operating cash flow. If global financial markets and economic conditions disrupt and reduce stability in general, and the solvency of creditors specifically, the availability of funding from credit markets, would be reduced as many lenders and institutional investors would enact tighter lending standards, refuse to refinance existing debt on terms similar to current debt or, in some cases, cease to provide funding to borrowers. These issues coupled with weak economic conditions would make it more difficult for us, our suppliers and our customers to obtain funding. If we are unable to obtain trade or other forms of credit on reasonable and competitive terms, the ability to continue our marketing businesses, pursue improvements, and continue future growth will be limited. We cannot assure you that we will be able to maintain future credit arrangements on commercially reasonable terms.

Fluctuations in crude oil and natural gas prices could have an adverse effect on us.

Our future financial condition, revenues, results of operations and future rate of growth are materially affected by crude oil and natural gas prices that historically have been volatile and are likely to continue to be volatile in the future. Crude oil and natural gas prices depend on factors outside of our control. These factors include:

supply and demand for crude oil and natural gas and expectations regarding supply and demand;
political conditions in other crude oil-producing countries, including the possibility of insurgency or war in such areas;
economic conditions in the U.S. and worldwide;
governmental regulations and taxation;
impact of energy conservation efforts;
the price and availability of alternative fuel sources;
weather conditions;
availability of local, interstate and intrastate transportation systems; and
market uncertainty.
 

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The financial soundness of customers could affect our business and operating results.

Constraints in the financial markets and other macro-economic challenges that might affect the economy of the U.S. and other parts of the world could cause our customers to experience cash flow concerns. As a result, if our customers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, customers would not be able to pay, or may delay payment of, accounts receivable owed to us. Any inability of current and/or potential customers to pay for services may adversely affect our financial condition and results of operations.

Counterparty credit default could have an adverse effect on us.

Our revenues are generated under contracts with various counterparties, and our results of operations could be adversely affected by non-performance under the various contracts. A counterparty’s default or non-performance could be caused by factors beyond our control. A default could occur as a result of circumstances relating directly to the counterparty, or due to circumstances caused by other market participants having a direct or indirect relationship with the counterparty. We seek to mitigate the risk of default by evaluating the financial strength of potential counterparties; however, despite mitigation efforts, contractual defaults may occur from time to time.

Potentially escalating diesel fuel prices could have an adverse effect on us.

As an integral part of our marketing and transportation businesses, we operate approximately 390 truck-tractors, and diesel fuel costs are a significant component of our operating expenses. These costs generally fluctuate with increasing and decreasing world crude oil prices. During periods of high prices, we attempt to recoup rising diesel fuel costs through the pricing of our services; however to the extent these costs escalate, our operating earnings will generally be adversely affected.

Revenues are generated under contracts that must be renegotiated periodically.

Substantially all of our revenues are generated under contracts which expire periodically or which must be frequently renegotiated, extended or replaced. Whether these contracts are renegotiated, extended or replaced is often subject to factors beyond our control. These factors include sudden fluctuations in crude oil and natural gas prices, counterparty ability to pay for or accept the contracted volumes and, most importantly, an extremely competitive marketplace for the services we offer. We cannot assure you that the costs and pricing of our services can remain competitive in the marketplace or that we will be successful in renegotiating our contracts.

Anticipated or scheduled volumes will differ from actual or delivered volumes.

Our crude oil marketing business purchases initial production of crude oil at the wellhead under contracts requiring us to accept the actual volume produced. The resale of this production is generally under contracts requiring a fixed volume to be delivered. We estimate our anticipated supply and match that supply estimate for both volume and pricing formulas with committed sales volumes. Since actual wellhead volumes produced will never equal anticipated supply, our marketing margins may be adversely impacted. In many instances, any losses resulting from the difference between actual supply volumes compared to committed sales volumes must be absorbed by us.

Environmental liabilities and environmental regulations may have an adverse effect on us.

Our business is subject to environmental hazards such as spills, leaks or any discharges of petroleum products and hazardous substances. These environmental hazards could expose us to material liabilities for property damage, personal injuries, and/or environmental harms, including the costs of investigating and rectifying contaminated properties.

    

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Environmental laws and regulations govern many aspects of our business, such as drilling and exploration, production, transportation and waste management. Compliance with environmental laws and regulations can require significant costs or may require a decrease in production. Moreover, noncompliance with these laws and regulations could subject us to significant administrative, civil, and/or criminal fines and/or penalties, as well as potential injunctive relief. See discussion under Item 1 and 2. Business and Properties — Regulatory Matters, and in the sections that follow, for additional detail.

Our operations could result in liabilities that may not be fully covered by insurance.

Transportation of hazardous materials involves certain operating hazards such as automobile accidents, explosions, fires and pollution. Any of these operating hazards could cause serious injuries, fatalities or property damage, which could expose us to liability. The payment of any of these liabilities could reduce, or even eliminate, the funds available for other areas.

Consistent with the industry standard, our insurance policies provide limited coverage for losses or liabilities relating to pollution, with broader coverage provided for sudden and accidental occurrences. Insurance might be inadequate to cover all liabilities. Obtaining insurance for our line of business can become difficult and costly. Typically, when insurance cost escalates, we may reduce our level of coverage, and more risk may be retained to offset cost increases. If substantial liability is incurred and damages are not covered by insurance or exceed policy limits, our operation and financial condition could be materially adversely affected.

We could be adversely affected by changes in tax laws or regulations.

The Internal Revenue Service, the U.S. Treasury Department, Congress and the states frequently review federal or state income tax legislation. We cannot predict whether, when, or to what extent new federal or state tax laws, regulations, interpretations or rulings will be adopted. Any such legislative action may prospectively or retroactively modify tax treatment and, therefore, may adversely affect taxation of us.

The Tax Cuts and Jobs Act, signed into law on December 22, 2017, is expected to have a favorable impact on our effective tax rate and net income as reported under generally accepted accounting principles in the U.S. both in the first fiscal quarter of 2018 and subsequent reporting periods to which the Tax Cuts and Jobs Act is effective. However, given the many changes resulting from the Tax Cuts and Jobs Act, we are assessing the impact of the Tax Cuts and Jobs Act, and there can be no assurances that it will have a favorable impact. You should consult with your tax advisors with respect to the effect of the Tax Cuts and Jobs Act and any other regulatory or administrative developments and proposals and the potential effect on your investment in AE.

Our business is subject to changing government regulations.

Federal, state or local government agencies may impose environmental, labor or other regulations that increase costs and/or terminate or suspend operations. Our business is subject to federal, state and local laws and regulations. These regulations relate to, among other things, transportation of crude oil and natural gas. Existing laws and regulations could be changed, and any changes could increase costs of compliance and costs of operations.

Security issues exist relating to drivers, equipment and terminal facilities.

We transport liquid combustible materials including petrochemicals, and these materials may be a target for terrorist attacks. While we employ a variety of security measures to mitigate risks, we cannot assure you that such events will not occur.


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Current and future litigation could have an adverse effect on us.

We are currently involved in certain administrative and civil legal proceedings as part of the ordinary course of our business. Moreover, as incidental to operations, we sometimes become involved in various lawsuits and/or disputes. Lawsuits and other legal proceedings can involve substantial costs, including the costs associated with investigation, litigation and possible settlement, judgment, penalty or fine. Although we maintain insurance to mitigate these costs, we cannot assure you that costs associated with lawsuits or other legal proceedings will not exceed the limits of insurance policies. Our results of operations could be adversely affected if a judgment, penalty or fine is not fully covered by insurance.

Climate change legislation or regulations restricting emissions of “greenhouse gases” (“GHGs”) could result in increased operating costs and reduced demand for the crude oil and natural gas we produce, market and transport.

More stringent laws and regulations relating to climate change and GHGs may be adopted and could cause us to incur material expenses to comply with such laws and regulations. In the absence of comprehensive federal legislation on GHG emission control, the EPA attempted to require the permitting of GHG emissions; although the Supreme Court struck down the permitting requirements, it upheld the EPA’s authority to control GHG emissions when a permit is required due to emissions of other pollutants. The EPA also requires the reporting of GHG emissions from specified large GHG emission sources including onshore and offshore crude oil and natural gas production facilities and onshore crude oil and natural gas processing, transmission, storage and distribution facilities. Reporting of GHG emissions from such large facilities is required on an annual basis. We do not presently operate any such large GHG emission sources but, if we were to do so in the future, we would incur costs associated with evaluating and meeting this reporting obligation.

In May 2016, the EPA finalized rules to reduce methane emissions from new, modified or reconstructed sources in the crude oil and natural gas sector, although the rules are currently the subject of litigation and in June 2017, the EPA proposed a 2-year stay of the rules. The EPA announced in March 2016 that it also intends to reduce methane emissions for existing sources, but the EPA announced in March 2017 that it no longer intends to pursue regulation of methane emissions from existing sources. In November 2016, the Bureau of Land Management issued final rules to reduce methane emissions from venting, flaring, and leaks during crude oil and natural gas operations on public lands, although the present administration is proposing to delay the implementation dates applicable to requirements under these rules. Several states, are pursuing similar measures to regulate emissions of methane from new and existing sources within the crude oil and natural gas source category.

In addition, the U.S. Congress has considered legislation to reduce emissions of GHGs, and many states and regions have already taken legal measures to reduce or measure GHG emission levels, often involving the planned development of GHG emission inventories and/or regional cap and trade programs. Most of these cap and trade programs require major sources of emissions or major producers of fuels to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to reduce overall GHG emissions, and the cost of these allowances could escalate significantly over time. In the markets in which we currently operate, our operations are not affected by such GHG cap and trade programs. On an international level, almost 200 nations agreed in December 2015 to an international climate change agreement in Paris, France that calls for countries to set their own GHG emissions targets and be transparent about the measures each country will use to achieve its GHG emissions targets. Although the present administration has announced its intention to withdraw from the Paris accord, several states and local governments remain committed to its principles in their effectuation of policy and regulations. It is not possible at this time to predict how or when the U.S. might impose restrictions on GHGs as a result of the international climate change agreement. The adoption and implementation of any legislation or regulatory programs imposing GHG reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations including costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our GHG emissions, pay any taxes related to GHG emissions, administer and manage a GHG emissions program. Such programs also could adversely affect demand for the crude oil and natural gas that we market and transport.


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We are subject to risks associated with climate change.
In an interpretative guidance on climate change disclosures, the SEC indicates that climate change could have an effect on the severity of weather (including hurricanes and floods), sea levels, the arability of farmland, and water availability and quality. If such effects were to occur, our operations have the potential to be adversely affected. Potential adverse effects could include disruption of our marketing and transportation activities, including, for example, damages to our facilities from powerful winds or floods, or increases in our costs of operation or reductions in the efficiency of our operations, as well as potentially increased costs for insurance coverages in the aftermath of such effects. Significant physical effects of climate change could also have an indirect effect on our financing and operations by disrupting the transportation or process related services provided by companies or suppliers with whom we have a business relationship. In addition, the demand for and consumption of our products and services (due to change in both costs and weather patterns), and the economic health of the regions in which we operate, could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may not be able to recover through insurance some or any of the damages, losses or costs that may result from potential physical effects of climate change.

Cyber-attacks or other disruptions to our information technology systems could lead to reduced revenue, increased costs, liability claims, fines or harm to our competitive position.

We are subject to cybersecurity risks and may incur increasing costs in connection with our efforts to enhance and ensure security and in response to actual or attempted cybersecurity attacks. Substantial aspects of our business depend on the secure operation of our computer systems and websites. Security breaches could expose us to a risk of loss, misuse, or interruption of sensitive and critical information and functions, including our own proprietary information and that of our customers, suppliers and employees.  Such breaches could result in operational impacts, reputational harm, competitive disadvantage, litigation, regulatory enforcement actions, and liability. While we devote substantial resources to maintaining adequate levels of cybersecurity, we cannot assure you that we will be able to prevent all of the rapidly evolving types of cyberattacks. Actual or anticipated attacks and risks may cause us to incur increasing costs for technology, personnel and services to enhance security or to respond to occurrences.

We have programs, processes and technologies in place to attempt to prevent, detect, contain, respond to and mitigate security-related threats and potential incidents. We undertake ongoing improvements to our systems, connected devices and information-sharing products in order to minimize vulnerabilities, in accordance with industry and regulatory standards; however, because the techniques used to obtain unauthorized access change frequently and can be difficult to detect and anticipating, identifying or preventing these intrusions or mitigating them if and when they occur is challenging and makes us more vulnerable to cyber-attacks than other companies not similarly situated.

If our security measures are circumvented, proprietary information may be misappropriated, our operations may be disrupted, and our computers or those of our customers or other third parties may be damaged. Compromises of our security may result in an interruption of operations, violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures.
    

Item 1B. Unresolved Staff Comments.

None.



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Item 3. Legal Proceedings.

From time to time as incidental to our operations, we may become involved in various lawsuits and/or disputes. Primarily as an operator of an extensive trucking fleet, we are a party to motor vehicle accidents, workers’ compensation claims and other items of general liability as would be typical for the industry. We are currently unaware of any claims against us that are either outside the scope of insurance coverage or that may exceed the level of insurance coverage and could potentially represent a material adverse effect on our financial position or results of operations.

See Note 13 in the Notes to Consolidated Financial Statements for further discussion.


Item 4. Mine Safety Disclosures.

Not applicable.


PART II

Item 5.
Market for Registrant’s Common Stock, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Our common stock is traded on the NYSE MKT under the ticker symbol “AE”. As of February 28, 2018, there were approximately 140 shareholders of record of our common shares. The following table presents high and low sales prices for our common stock for the periods presented as reported by the NYSE MKT and the amount, record date and payment date of the quarterly cash dividends we paid on each of our common shares with respect to such periods.
 
 
 
 
 
Cash Dividend History
 
Price Ranges
 
Per
 
Record
 
Payment
 
High
 
Low
 
Share
 
Date
 
Date
2015
 
 
 
 
 
 
 
 
 
1st Quarter
$73.28
 
$47.31
 
$0.22
 
6/3/2015
 
6/17/2015
2nd Quarter
$70.00
 
$39.00
 
$0.22
 
9/3/2015
 
9/17/2015
3rd Quarter
$48.60
 
$38.88
 
$0.22
 
12/2/2015
 
12/16/2015
4th Quarter
$46.86
 
$33.55
 
$0.22
 
3/11/2016
 
3/23/2016
 
 
 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
 
1st Quarter
$43.00
 
$30.00
 
$0.22
 
6/3/2016
 
6/17/2016
2nd Quarter
$44.27
 
$35.25
 
$0.22
 
9/6/2016
 
9/19/2016
3rd Quarter
$39.47
 
$29.64
 
$0.22
 
12/5/2016
 
12/19/2016
4th Quarter
$44.00
 
$35.17
 
$0.22
 
3/10/2017
 
3/24/2017
 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
1st Quarter
$41.99
 
$34.23
 
$0.22
 
6/2/2017
 
6/16/2017
2nd Quarter
$43.80
 
$35.64
 
$0.22
 
9/6/2017
 
9/20/2017
3rd Quarter
$42.77
 
$32.80
 
$0.22
 
12/5/2017
 
12/19/2017
4th Quarter
$50.59
 
$40.36
 
$0.22
 
3/9/2018
 
3/23/2018


Issuer Purchases of Equity Securities

None.


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Performance Graph

The following graph compares the total shareholder return performance of our common stock with the performance of: (i) the Standard & Poor’s 500 Stock Index (“S&P 500”) and (ii) the S&P 500 Integrated Oil and Gas Index. The graph assumes that $100 was invested in our common stock and each comparison index beginning on December 31, 2012 and that all dividends were reinvested on a quarterly basis on the ex-dividend dates. The graph was prepared under the applicable rules of the SEC based on data supplied by Research Data Group. The stock performance shown on the graph is not necessarily indicative of future price performance.
grapha01.jpg
 
December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
Adams Resources & Energy, Inc.
$
100.00

 
$
197.45

 
$
146.15

 
$
114.46

 
$
120.99

 
$
135.74

S&P 500
100.00

 
132.39

 
150.51

 
152.59

 
170.84

 
208.14

S&P Integrated Oil & Gas
100.00

 
121.53

 
113.35

 
97.64

 
121.21

 
123.73


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Table of Contents


Item 6. Selected Financial Data.

The following table presents our selected historical consolidated financial data. This information has been derived from and should be read in conjunction with our audited financial statements included under Part II, Item 8 of this annual report, which presents our audited balance sheets as of December 31, 2017 and 2016 and related consolidated statements of operations, cash flows and shareholders’ equity for the three years ended December 31, 2017, 2016 and 2015, respectively. As presented in the table, amounts are in thousands (except per share data).
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Statements of operations data:
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Marketing
$
1,267,275

 
$
1,043,775

 
$
1,875,885

 
$
4,050,497

 
$
3,863,057

Transportation
53,358

 
52,355

 
63,331

 
68,968

 
68,783

Oil and natural gas
1,427

 
3,410

 
5,063

 
13,361

 
14,129

Total revenues
1,322,060

 
1,099,540

 
1,944,279

 
4,132,826

 
3,945,969

 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
Marketing
1,247,763

 
1,016,733

 
1,841,893

 
4,020,017

 
3,815,006

Transportation
48,538

 
45,154

 
52,076

 
56,802

 
56,504

Oil and natural gas
948

 
2,084

 
6,931

 
7,817

 
6,117

Oil and natural gas property impairments (1)
3

 
313

 
12,082

 
8,009

 
2,631

Oil and natural gas property sale (2)

 

 

 
(2,528
)
 

General and administrative
9,707

 
10,410

 
9,939

 
8,613

 
9,060

Depreciation, depletion and amortization
13,599

 
18,792

 
23,717

 
24,615

 
22,275

 
 
 
 
 
 
 
 
 
 
Operating earnings (losses)
1,502

 
6,054

 
(2,359
)
 
9,481

 
34,376

 
 
 
 
 
 
 
 
 
 
Loss on deconsolidation of subsidiary (3)
(3,505
)
 

 

 

 

Impairment of investment in unconsolidated
 
 
 
 
 
 
 
 
 
affiliate (4)
(2,500
)
 

 

 

 

Interest income (expense)
1,076

 
580

 
314

 
299

 
174

 
 
 
 
 
 
 
 
 
 
Earnings (losses) from continuing operations
(3,427
)
 
6,634

 
(2,045
)
 
9,780

 
34,550

 
 
 
 
 
 
 
 
 
 
Income tax (provision) benefit
2,945

 
(2,691
)
 
770

 
(3,561
)
 
(12,429
)
 
 
 
 
 
 
 
 
 
 
Earnings (losses) before investment in
 
 
 
 
 
 
 
 
 
unconsolidated affiliate
 
 
 
 
 
 
 
 
 
and discontinued operations
(482
)
 
3,943

 
(1,275
)
 
6,219

 
22,121

 
 
 
 
 
 
 
 
 
 
Discontinued operations, net of taxes

 

 

 
304

 
(511
)
Losses from investment in unconsolidated
 
 
 
 
 
 
 
 
 
affiliate, net of tax (5)

 
(1,430
)
 

 

 

Net (losses) earnings
$
(482
)
 
$
2,513

 
$
(1,275
)
 
$
6,523

 
$
21,610

 
 
 
 
 
 
 
 
 
 
Earnings (losses) per share:
 
 
 
 
 
 
 
 
 
From continuing operations
$
(0.11
)
 
$
0.94

 
$
(0.30
)
 
$
1.48

 
$
5.24

From investment in unconsolidated
 
 
 
 
 
 
 
 
 
affiliate

 
(0.34
)
 

 

 

From discontinued operations

 

 

 
0.07

 
(0.12
)
Basic and diluted earnings per share
$
(0.11
)
 
$
0.60

 
$
(0.30
)
 
$
1.55

 
$
5.12

 
 
 
 
 
 
 
 
 
 
Dividends per common share
$
0.88

 
$
0.88

 
$
0.88

 
$
0.88

 
$
0.66

 
 
 
 
 
 
 
 
 
 

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Table of Contents


 
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Balance sheet data: 
 
 
 
 
 
 
 
 
 
Cash
$
109,393

 
$
87,342

 
$
91,877

 
$
80,184

 
$
60,733

Total assets
282,704

 
246,872

 
243,215

 
340,814

 
448,082

Long-term debt

 

 

 

 

Shareholders’ equity
147,119

 
151,312

 
152,510

 
157,497

 
154,685

Dividends on common shares
3,711

 
3,711

 
3,712

 
3,711

 
2,783

________________________
(1)
During 2015, we recognized an impairment of $10.3 million on producing properties, and an impairment of $1.8 million on non-producing properties.
(2)
During 2014, we sold certain crude oil and natural gas producing properties for $4.1 million, producing a net gain of $2.5 million.
(3)
During 2017, we recognized an impairment related to the bankruptcy, deconsolidation and sale of our upstream crude oil and natural gas exploration and production subsidiary.
(4)
During 2017, we recognized an impairment on our medical investment in VestaCare.
(5)
During 2016, we recognized losses and an impairment on our medical investment in Bencap LLC (“Bencap”). We have no other medical-related investments, and we currently do not have any plans to pursue additional medical-related investments.


18


Table of Contents


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following information should be read in conjunction with our Consolidated Financial Statements and accompanying notes included under Part II, Item 8 of this annual report. Our financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”).

Overview of Business

Adams Resources & Energy, Inc. (“AE”), a Delaware corporation organized in 1973, and its subsidiaries are primarily engaged in the business of crude oil marketing, transportation and storage in various crude oil and natural gas basins in the lower 48 states of the U.S. We also conduct tank truck transportation of liquid chemicals and dry bulk and ISO tank container storage and transportation primarily in the lower 48 states of the U.S. with deliveries into Canada and Mexico, and with terminals in the Gulf Coast region of the U.S.

Historically, we have operated and reported in three business segments: (i) crude oil marketing, transportation and storage, (ii) tank truck transportation of liquid chemicals and dry bulk and ISO tank container storage and transportation, and (iii) upstream crude oil and natural gas exploration and production. We exited the upstream crude oil and natural gas exploration and production business during 2017 with the sale of our upstream crude oil and natural gas exploration and production assets.

2017 Developments

Subsidiary Bankruptcy, Deconsolidation and Sale

On April 21, 2017, one of our wholly owned subsidiaries, AREC, filed a voluntary petition in the U.S. Bankruptcy Court seeking relief under Chapter 11 of Title 11 of the Bankruptcy Code. AREC operated its business and managed its properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and order of the Bankruptcy Court. AE was the primary creditor in the Chapter 11 process.

During the second quarter of 2017, we recorded a non-cash charge of approximately $1.6 million associated with the deconsolidation of AREC, which reflected the excess of the net assets of AREC over its estimated fair value based on an expected sales transaction price of approximately $5.0 million, net of estimated transaction costs. During the third quarter of 2017, Bankruptcy Court approval was obtained on three asset purchase and sales agreements with three unaffiliated parties, and AREC closed on the sales of substantially all of its assets.

In October 2017, AREC submitted its liquidation plan to the Bankruptcy Court for approval. In connection with the sales of these assets and submission of the liquidation plan, we recognized an additional loss of $1.9 million during the third quarter of 2017, which represents the difference between the proceeds we expect to be paid upon settlement of the bankruptcy, net of anticipated remaining closing costs identified as part of the liquidation plan, and the book value of our cost method investment. In December 2017, we received proceeds of approximately $2.8 million from AREC related to the settlement of a portion of the bankruptcy process. We obtained approval of a confirmed plan in December 2017, and we expect the case to be dismissed during the first half of 2018. We anticipate receiving an additional $0.4 million in 2018 when the bankruptcy case is dismissed.

In connection with the bankruptcy filing, AREC entered into the DIP Credit Agreement with AE, which was repaid during the third quarter of 2017 with proceeds from the sales of the assets. See Note 3 in the Notes to Consolidated Financial Statements for further information.


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Table of Contents


Voluntary Early Retirement Program

In August 2017, we implemented a voluntary early retirement program for certain employees, which resulted in an increase in personnel expenses of approximately $1.4 million. Of this amount, approximately $1.0 million was included in general and administrative expenses and $0.4 million was included in operating expenses.

Impairment of Investment in Unconsolidated Affiliate

During the third quarter of 2017, we completed a review of our investment in VestaCare and determined that there was an other than temporary impairment as the current projected operating results of VestaCare did not support the carrying value of our investment. As such, we recognized a pre-tax impairment charge of $2.5 million during the third quarter of 2017 related to our investment in VestaCare. See Note 7 in the Notes to Consolidated Financial Statements for further information.


Results of Operations

Marketing

Our crude oil marketing segment revenues, operating earnings and selected costs were as follows for the periods indicated (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
Change (1)
 
2015
 
Change (1)
 
 
 
 
 
 
 
 
 
 
Revenues
$
1,267,275

 
$
1,043,775

 
21.4
%
 
$
1,875,885

 
(44.4
%)
Operating earnings
11,700

 
17,045

 
(31.4
%)
 
22,895

 
(25.6
%)
Depreciation and amortization
7,812

 
9,997

 
(21.9
%)
 
11,097

 
(9.9
%)
Driver commissions
13,058

 
14,933

 
(12.6
%)
 
22,262

 
(32.9
%)
Insurance
4,509

 
7,442

 
(39.4
%)
 
8,732

 
(14.8
%)
Fuel
5,278

 
5,397

 
(2.2
%)
 
9,928

 
(45.6
%)
____________________
(1)
Represents the percentage increase (decrease) from the prior year.

Volume and price information were as follows for the periods indicated:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Field level purchase volumes – per day (1)
 
 
 
 
 
Crude oil – barrels
67,447

 
72,900

 
106,400

 
 
 
 
 
 
Average purchase price
 
 
 
 
 
Crude oil – per barrel
$
49.88

 
$
39.30

 
$
45.41

____________________
(1)
Reflects the volume purchased from third parties at the field level of operations.

2017 compared to 2016. Crude oil marketing revenues increased by $223.5 million during the year ended December 31, 2017 as compared to 2016 primarily as a result of an increase in the market price of crude oil, which increased revenues by approximately $329.7 million, partially offset by lower crude oil volumes, which decreased revenues by approximately $106.2 million. The average crude oil price received was $39.30 for 2016, which increased to $49.88 for 2017.


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Table of Contents


Our marketing operating earnings for the year ended December 31, 2017 decreased by $5.3 million as compared to 2016, primarily as a result of declines in crude oil volumes, including declines as a result of the effects of Hurricane Harvey, which affected the Gulf Coast area in late August and early September 2017, as well as a narrowing of margins during 2017. Operating earnings were also impacted by inventory valuation changes (as shown in the table below) and the implementation in August 2017 of a voluntary early retirement program for certain employees, which resulted in an increase in personnel expenses of approximately $0.4 million. During the latter part of 2017, volumes began increasing as activity in certain marketing areas increased primarily as a result of increased wellhead purchases.

Driver commissions decreased by $1.9 million during the year ended December 31, 2017 as compared to 2016, primarily as a result of the decrease in crude oil marketing volumes in 2017. Insurance costs decreased by $2.9 million during the year ended December 31, 2017 as compared to 2016, primarily as a result of favorable driver safety performance and reduced mileage during 2017 as compared to 2016. Fuel costs decreased by $0.1 million during the year ended December 31, 2017 as compared to 2016 consistent with decreased marketing volumes and lower crude oil prices during 2016, offset by an increase in the price of diesel fuel during 2017 as compared to 2016.

2016 compared to 2015. Crude oil marketing revenues decreased by $832.1 million during the year ended December 31, 2016 as compared to 2015, primarily as a result of lower crude oil volumes, which decreased revenues by approximately $475.5 million and a decrease in the market price of crude oil, which decreased revenues by approximately $356.6 million. The average crude oil price received was $45.41 for 2015, which decreased to $39.30 for 2016. Lower crude oil prices resulted in curtailed drilling efforts in most areas. Crude marketing volumes decreased as a result of lower wellhead purchases in 2016 as compared to 2015.

Our marketing segment operating earnings for the year ended December 31, 2016 decreased by $5.9 million as compared to 2015, primarily as a result of declines in crude oil volumes and a decrease in the market price of crude oil. Volume declines resulted from a decrease in wellhead purchases, partially offset by inventory valuation changes (as shown in the table below).

Driver commissions decreased by $7.3 million during the year ended December 31, 2016 as compared to 2015, primarily as a result of the decrease in crude oil marketing volumes. Insurance costs decreased by $1.3 million during the year ended December 31, 2016 as compared to 2015, primarily as a result of favorable driver safety performance during 2016 as compared to 2015. Fuel costs decreased by $4.5 million during the year ended December 31, 2016 as compared to 2015 consistent with decreased marketing volumes and lower crude oil prices during 2016 as compared to 2015.

Field Level Operating Earnings (Non-GAAP Financial Measure). Inventory valuations and forward commodity contract (derivatives or mark-to-market) valuations are two significant factors affecting comparative crude oil marketing segment operating earnings. As a purchaser and shipper of crude oil, we hold inventory in storage tanks and third-party pipelines. During periods of increasing crude oil prices, we recognize inventory liquidation gains while during periods of falling prices, we recognize inventory liquidation and valuation losses.

Crude oil marketing operating earnings can be affected by the valuations of our forward month commodity contracts (derivative instruments). These non-cash valuations are calculated and recorded at each period end based on the underlying data existing as of such date. We generally enter into these derivative contracts as part of a pricing strategy based on crude oil purchases at the wellhead (field level). The valuation of derivative instruments at period end requires the recognition of non-cash “mark-to-market” gains and losses.

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Table of Contents


The impact of inventory liquidations and derivative valuations on our marketing segment operating earnings is summarized in the following reconciliation of our non-GAAP financial measure for the periods indicated (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
As reported segment operating earnings (1)
$
11,700

 
$
17,045

 
$
22,895

Add (subtract):
 
 
 
 
 
Inventory liquidation gains
(3,372
)
 
(8,243
)
 

Inventory valuation losses

 

 
5,357

Derivative valuation (gains) losses
27

 
(243
)
 
188

Field level operating earnings (2)
$
8,355

 
$
8,559

 
$
28,440

____________________
(1)
Segment operating earnings included inventory liquidation gains of $3.3 million and $8.2 million for the years ended December 31, 2017 and 2016, respectively, and inventory valuation losses of $5.4 million for the year ended December 31, 2015.
(2)
The use of field level operating earnings is (a) unique to us, (b) not a substitute for a GAAP measure and (c) may not be comparable to any similar measures developed by industry participants. We utilize this data to evaluate the profitability of our operations.

Field level operating earnings and field level purchase volumes depict our day-to-day operation of acquiring crude oil at the wellhead, transporting the product and delivering the product to market sales points. Field level operating earnings decreased during the year ended December 31, 2017 as compared to 2016, primarily due to increased personnel costs related to the voluntary early retirement program, partially offset by increased volumes and the effects of a newly negotiated barge contract, which reduced operating expenses, beginning in the third quarter of 2017.

Field level operating earnings decreased during the year ended December 31, 2016 as compared to 2015 as competition and additional industry infrastructure development progressed in the region. A key factor in unit margins is the value difference between crude oil supplies in the mid-continent region of the U.S. versus crude oil supply costs in the eastern region of the U.S. We have been able to capture some of this value difference by shipping crude oil from the Texas Gulf Coast to other locations.

We held crude oil inventory at a weighted average composite price as follows at the dates indicated (in barrels):
 
December 31,
 
2017
 
2016
 
2015
 
 
 
Average
 
 
 
Average
 
 
 
Average
 
Barrels
 
Price
 
Barrels
 
Price
 
Barrels
 
Price
 
 
 
 
 
 
 
 
 
 
 
 
Crude oil inventory
198,011

 
$
61.57

 
255,146

 
$
51.22

 
261,718

 
$
29.31


Historically, prices received for crude oil have been volatile and unpredictable with price volatility expected to continue. See “Item 1A. Risk Factors.


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Transportation

Our transportation segment revenues, operating earnings (losses) and selected costs were as follows for the periods indicated (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
Change (1)
 
2015
 
Change (1)
 
 
 
 
 
 
 
 
 
 
Revenues
$
53,358

 
$
52,355

 
1.9
%
 
$
63,331

 
(17.3
%)
Operating earnings (losses)
$
(544
)
 
$
(48
)
 
1033.3
%
 
$
3,701

 
(101.3
%)
Depreciation and amortization
$
5,364

 
$
7,249

 
(26.0
%)
 
$
7,554

 
(4.0
%)
Driver commissions
$
11,546

 
$
11,227

 
2.8
%
 
$
13,265

 
(15.4
%)
Insurance
$
5,452

 
$
4,952

 
10.1
%
 
$
4,543

 
9.0
%
Fuel
$
6,401

 
$
5,688

 
12.5
%
 
$
8,134

 
(30.1
%)
Maintenance expense
$
6,061

 
$
5,410

 
12.0
%
 
$
6,365

 
(15.0
%)
Mileage (000s)
21,836

 
22,611

 
(3.4
%)
 
25,205

 
(10.3
%)
____________________
(1)
Represents the percentage increase (decrease) from the prior year.

Our revenue rate structure includes a component for fuel costs in which fuel cost fluctuations are largely passed through to the customer over time. Revenues, net of fuel cost, were as follows for the periods indicated (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Total transportation revenue
$
53,358

 
$
52,355

 
$
63,331

Diesel fuel cost
(6,401
)
 
(5,688
)
 
(8,134
)
Revenues, net of fuel cost (1)
$
46,957

 
$
46,667

 
$
55,197

____________________
(1)
Revenues, net of fuel cost, is a non-GAAP financial measure and is utilized for internal analysis of the results of our transportation segment.

2017 compared to 2016. Revenues, net of fuel cost, increased by $0.3 million during the year ended December 31, 2017, primarily as a result of increased activity in our transportation segment. We began to see a slight increase in transportation activity during late 2017, and we continue to pursue our strategy of streamlining operations and diversifying offerings in our transportation segment. This increase in services resulted in an increase in variable expenses related to transportation activities. Fuel increased by $0.7 million as a result of an increase in the price of diesel during 2017 as compared to 2016. Our operating results for 2017 were also adversely impacted by Hurricane Harvey, which affected the Gulf Coast area in late August and early September of 2017, resulting in decreased revenues and lower mileage during 2017.

2016 compared to 2015. Revenues, net of fuel cost, decreased by $8.5 million during the year ended December 31, 2016 as compared to 2015, because of lower demand as indicated by the decreased mileage during 2016 as compared to 2015. The combination of lower demand and excess industry-wide trucking capacity led to pressures on volumes and freight rates throughout 2016. The result is an adverse impact on operating earnings. During 2016, we reduced expenses through staff reductions and selling of older inefficient equipment. Fuel decreased by $2.4 million as a result of lower mileage during 2016 as compared to 2015.


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Equipment additions and retirement for the transportation fleet were as follows for the periods indicated:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
New truck-tractors purchased

 
      30 units

 
      60 units

Truck-tractors retired
21 units

 

 

New trailers purchased

 
      54 units

 
      12 units

Trailers retired

 
      50 units

 


The sale of retired equipment produced gains of less than $0.1 million, $0.4 million and less than $0.1 million during the years ended December 31, 2017, 2016 and 2015, respectively.

Our customers are primarily in the domestic petrochemical industry. Customer demand is affected by low natural gas prices (a basic feedstock cost for the petrochemical industry) and high export demand for petrochemicals. During 2016, the competitive landscape in the transportation sector remained difficult and led to lower revenues in this segment. During late 2017, we have seen an increase in customer demand for chemical tank trucking, and we are working on capturing those opportunities.

Oil and Gas
    
Our upstream crude oil and natural gas exploration and production segment revenues and operating earnings (losses) were primarily a function of crude oil and natural gas prices and volumes. We accounted for our upstream operations under the successful efforts method of accounting. As a result of AREC’s bankruptcy filing in April 2017 and our loss of control of this subsidiary, we deconsolidated AREC effective with its bankruptcy filing and recorded our investment in AREC under the cost method of accounting. Our results for 2017 are only through April 30, 2017, during the period in which AREC was consolidated.

Our upstream crude oil and natural gas exploration and production segment revenues, operating earnings (losses) and selected costs were as follows for the periods indicated (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
Change (1)
 
2015
 
Change (1)
 
 
 
 
 
 
 
 
 
 
Revenues (2)
$
1,427

 
$
3,410

 
(58.2
%)
 
$
5,063

 
(32.6
%)
Operating earnings (losses) (2)
53

 
(533
)
 
109.9
%
 
(19,016
)
 
97.2
%
Depreciation and depletion (2)
423

 
1,546

 
(72.6
%)
 
5,066

 
(69.5
%)
Dry hole expense (2)

 

 
0.0
%
 
817

 
(100.0
%)
Prospect impairments (2)
3

 
283

 
(98.9
%)
 
1,758

 
(83.9
%)
Producing property impairments (2)

 
30

 
(100.0
%)
 
10,324

 
(99.7
%)
____________________
(1)
Represents the percentage increase (decrease) from the prior year.
(2)
Results for 2017 represents amounts for the period from January 1, 2017 through April 30, 2017.

2017 compared to 2016. Our upstream crude oil and natural gas exploration and production revenues and depreciation and depletion expense decreased $2.0 million and $1.1 million, respectively, during the year ended December 31, 2017 as compared to 2016. These decreases were primarily as a result of the deconsolidation of AREC effective with its bankruptcy filing in April 2017 (four months of revenues and expenses in 2017 versus twelve months of revenues and expenses in 2016) as well as production declines offsetting commodity price increases in 2017.


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Table of Contents


2016 compared to 2015. Our upstream crude oil and natural gas exploration and production segment revenues and depreciation and depletion expense decreased $1.7 million and $3.5 million, respectively, during the year ended December 31, 2016 as compared to 2015, primarily as a result of production declines. Sales volumes decreased following normal production declines as persistently low prices curtailed the development of crude oil and natural gas properties in 2015 and 2016. Contributing to operating losses were property impairments as shown in the table above. Property impairments in 2015 occurred as result of declines in crude oil prices. Depreciation and depletion expense, calculated on a units-of-production basis, decreased primarily due to lower production volumes in 2016.

Volume and price information was as follows for the periods indicated (volumes in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
   
 
 
 
 
Crude oil
 
 
 
 
 
Volume – barrels (1)
11,643

 
34,200

 
50,000

Average price per barrel
$
49.44

 
$
38.07

 
$
46.51

 
 
 
 
 
 
Natural gas
 
 
 
 
 
Volume – Mcf (1)
189,488

 
662,000

 
889,000

Average price per Mcf
$
2.86

 
$
2.26

 
$
2.46

 
 
 
 
 
 
Natural gas liquids
 
 
 
 
 
Volume – barrels (1)
11,204

 
42,500

 
42,100

Average price per barrel
$
26.77

 
$
14.39

 
$
12.70

________________________________
(1)
Volumes for 2017 are only through April 30, 2017 as a result of the deconsolidation of this subsidiary due to its bankruptcy filing.

During the period from January 1, 2017 through April 30, 2017, we participated in the drilling of six wells in the Permian Basin and one well in the Haynesville Shale with no dry holes. During the year ended December 31, 2016, we participated in the drilling of seven wells in Permian Basin with no dry holes, and during the year ended December 31, 2015, we participated in the drilling of 14 wells with one dry hole.

During the years ended December 31, 2016 and 2015, impairment charges for crude oil and natural gas properties were approximately $0.3 million and $12.1 million, respectively.

Capitalized crude oil and natural gas property costs were amortized in expense as the underlying crude oil and natural gas reserves were produced (units-of-production method).

General and Administrative Expense

General and administrative expenses decreased by $0.7 million during the year ended December 31, 2017 as compared to 2016, primarily due to the deconsolidation of AREC in April 2017 (four months of expense in 2017 versus twelve months of expense in 2016), partially offset by an increase of approximately $1.0 million in personnel expenses in 2017 as a result of a voluntary early retirement program for certain employees, and higher legal and audit fees in 2017.

General and administrative expenses increased by $0.5 million during the year ended December 31, 2016 as compared to 2015, primarily as a result of increased use of outside consultants in the fourth quarter of 2016.  Expenses in 2015 were higher due to a $1.1 million lump sum payment made during the first quarter of 2015 to our former President upon his retirement.

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Table of Contents


Investments in Unconsolidated Affiliates

During the second quarter of 2017, we deconsolidated AREC effective with its bankruptcy filing on April 21, 2017 and recorded our investment in AREC under the cost method of accounting. Based upon bids received in the auction process (see Note 3 in the Notes to Consolidated Financial Statements for further information), we determined that the fair value of our investment in AREC was expected to be lower than its net book value immediately prior to the deconsolidation. As a result, during the second quarter of 2017, we recorded a non-cash charge of $1.6 million associated with the deconsolidation of AREC, which reflected the excess of the net assets of AREC over its estimated fair value based on an expected sales transaction price of approximately $5.0 million, net of estimated transaction costs. During the third quarter of 2017, we recognized an additional loss of $1.9 million, which represents the difference between the proceeds we expect to be paid upon settlement of the bankruptcy, net of anticipated remaining closing costs identified as part of the liquidation plan, and the book value of our cost method investment.

During the third quarter of 2017, we completed a review of our investment in VestaCare and determined that there was an other than temporary impairment as the current projected operating results of VestaCare did not support the carrying value of our investment. As such, we recognized a pre-tax impairment charge of $2.5 million during the third quarter of 2017 related to our investment in VestaCare.

During the year ended December 31, 2016, we completed a review of our equity method investment in Bencap and determined that there was an other than temporary impairment. Under the terms of the investment agreement, Bencap had the option to request borrowings from us of up to $1.5 million (on or after December 5, 2016 but before October 31, 2018) that we were required to provide or forfeit our 30 percent member interest. During 2016, our management determined that we were unlikely to provide additional funding due to Bencap’s lower than projected revenue growth and operating losses since investment inception. During the third quarter of 2016, we recognized an after-tax net loss of $1.4 million to write-off our investment in Bencap, which included a pre-tax impairment charge of $1.7 million, pre-tax losses from the equity method investment of $0.5 million and a tax benefit of $0.8 million.

Income Taxes

Provision for (benefit from) income taxes is based upon federal and state tax rates, and variations in amounts are consistent with taxable income in the respective accounting periods.

On December 22, 2017, the Tax Cut and Jobs Act was enacted into law resulting in a reduction in the federal corporate income tax rate from 35 percent to 21 percent for years beginning in 2018. At December 31, 2017, we had a deferred tax liability of approximately $3.3 million (reflecting a reduction of approximately $2.0 million resulting from the lower rate under which those deferred taxes would be expected to be recovered or settled). As a result of the lower tax rate, we expect to see a decrease in either our provision for or benefit from income taxes during 2018 as compared to 2017.

See Note 11 in the Notes to Consolidated Financial Statements for further information.



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Table of Contents


Liquidity and Capital Resources

Liquidity

Our liquidity is from our cash balance and net cash provided by operating activities and is therefore dependent on the success of future operations. If our cash inflow subsides or turns negative, we will evaluate our investment plan and remain flexible.

One of our wholly owned subsidiaries, AREC, filed for bankruptcy in April 2017. Over the past few years, we have de-emphasized our upstream operations and do not expect this Chapter 11 filing by AREC to have a material adverse impact on any of our core businesses. In connection with its bankruptcy filing, AREC entered into the DIP Credit Agreement with AE. AREC borrowed approximately $0.4 million under the DIP Credit Agreement, and the amount was repaid during the third quarter of 2017 with proceeds from the sales of the assets. AE was the primary creditor in AREC’s Chapter 11 process. As a result of an auction process (see Note 1 in the Notes to Consolidated Financial Statements), AREC sold its assets for approximately $5.2 million during 2017. After settlement of certain claims in late 2017, AE received approximately $2.8 million from AREC. AE anticipates receiving an additional $0.4 million in 2018 when the bankruptcy case is dismissed.

At December 31, 2017, 2016 and 2015, we had no bank debt or other forms of debenture obligations. We maintain cash balances in order to meet the timing of day-to-day cash needs. Cash and working capital, the excess of current assets over current liabilities, were as follows at the dates indicated (in thousands):
 
December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Cash and cash equivalents
$
109,393

 
$
87,342

 
$
91,877

Working capital
116,087

 
106,444

 
96,340


We maintain a stand-by letter of credit facility with Wells Fargo Bank, National Association to provide for the issuance of up to $60 million in stand-by letters of credit for the benefit of suppliers of crude oil within our crude oil marketing segment and for other purposes. Stand-by letters of credit are issued as needed and are canceled as the underlying purchase obligations are satisfied by cash payment when due. The issuance of stand-by letters of credit enables us to avoid posting cash collateral when procuring crude oil supply. We are currently using the letter of credit facility for a letter of credit related to our insurance program. At December 31, 2017, we had $2.2 million outstanding under this facility. During January 2018, the letter of credit amount outstanding decreased to approximately $0.9 million. No letter of credit amounts were outstanding at December 31, 2016.

We believe current cash balances, together with expected cash generated from future operations, and the ease of financing truck and trailer additions through leasing arrangements (should the need arise) will be sufficient to meet our short-term and long-term liquidity needs.

We utilize cash from operations to make discretionary investments in our marketing and transportation businesses. With the exception of operating and capital lease commitments primarily associated with storage tank terminal arrangements, leased office space and tractors, our future commitments and planned investments can be readily curtailed if operating cash flows decrease. See “Other Items” below for information regarding our operating and capital lease obligations.

The most significant item affecting future increases or decreases in liquidity is earnings from operations, and these earnings are dependent on the success of future operations. See “Part I, Item 1A. Risk Factors.


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Table of Contents


Cash Flows from Operating, Investing and Financing Activities

Our consolidated cash flows from operating, investing and financing activities were as follows for the periods indicated (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Cash provided by (used in):
 
 
 
 
 
Operating activities
$
26,096

 
$
6,944

 
$
25,477

Investing activities
(216
)
 
(7,768
)
 
(10,072
)
Financing activities
(3,829
)
 
(3,711
)
 
(3,712
)

Operating activities. Net cash flows provided by operating activities for the year ended December 31, 2017 increased by $19.2 million when compared to 2016. This increase was primarily due to an increase in revenues, partially offset by increased operating and general and administrative expenses.

Net cash flows provided by operating activities for the year ended December 31, 2016 decreased by $18.5 million when compared to 2015. This decrease was primarily due to a decrease in revenues, partially offset by a decrease in operating and general and administrative expenses.

At various times each month, we may make cash prepayments and/or early payments in advance of the normal due date to certain suppliers of crude oil within our marketing operations. Crude oil supply prepayments are recouped and advanced from month to month as the suppliers deliver product to us. In addition, in order to secure crude oil supply, we may also “early pay” our suppliers in advance of the normal payment due date of the twentieth of the month following the month of production. These “early payments” reduce cash and accounts payable as of the balance sheet date. We also require certain customers to make similar early payments or to post cash collateral with us in order to support their purchases from us. Early payments and cash collateral received from customers increases cash and reduces accounts receivable as of the balance sheet date.

Early payments were as follows at the dates indicated (in thousands):
 
December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Early payments received
$
20,078

 
$
15,032

 
$
16,770

Cash collateral received

 

 
840

Prepayments to suppliers

 

 
167

Early payments to suppliers
6,100

 
14,382

 
11,645


We rely heavily on our ability to obtain open-line trade credit from our suppliers especially with respect to our crude oil marketing operations. During the fourth quarter of 2016, we elected to make several early payments in our crude oil marketing operations. Our cash balance increased by approximately $22.1 million at December 31, 2017 relative to the year ended December 31, 2016 as the year end 2016 balance was slightly lower than normal as a result of these early payments made during the fourth quarter of 2016. Consistent with higher crude commodity prices, the need for early payments was higher at December 31, 2017 as compared to December 31, 2016 and 2015.


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Table of Contents


Investing activities. Net cash flows used in investing activities for the year ended December 31, 2017 decreased by $7.6 million when compared to 2016. The decrease was primarily due to a $5.8 million decrease in capital spending for property and equipment (see table below), a $4.7 million decrease in investments in unconsolidated affiliates and the receipt of $2.8 million of proceeds related to the partial settlement of AREC’s bankruptcy, partially offset by a $3.0 million decrease in cash proceeds from the sales of assets. During 2016, we invested a total of $4.7 million in two medical-related investments, VestaCare and Bencap.

Net cash flows used in investing activities for the year ended December 31, 2016 decreased by $2.3 million when compared to 2015. The decrease was primarily due to a $2.6 million decrease in capital spending for property and equipment (see table below) and a $3.0 million increase in cash proceeds from the sales of assets, partially offset by a $4.7 million increase in investments in unconsolidated affiliates, as discussed above.

Financing activities. Cash used in financing activities for the year ended December 31, 2017 increased by $0.1 million when compared to 2016 and 2015. During each of the years ended December 31, 2017, 2016 and 2015, we paid a quarterly cash dividend of $0.22 per common share ($0.88 per common share per year), or $3.7 million. During 2017, we paid $0.1 million of principal repayments on capital lease obligations that we entered into in 2017 for certain of our tractors in our marketing segment, with principal contractual commitments to be paid over a period of five years.

Capital Projects

We use cash from operations and existing cash balances to make discretionary investments in our marketing and transportation businesses. Capital spending for the past five years was as follows for the periods indicated (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
Crude oil marketing (1)
$
468

 
$
1,321

 
$
2,126

 
$
13,598

 
$
11,343

Truck transportation
351

 
6,868

 
6,579

 
8,994

 
3,165

Oil and natural gas exploration
1,825

 
295

 
2,369

 
7,931

 
13,094

Medical management

 
4,700

 

 

 

Capital spending
$
2,644

 
$
13,184

 
$
11,074

 
$
30,523

 
$
27,602

_______________
(1)
Our marketing segment amount for 2017 does not include approximately $1.8 million of tractors acquired under capital leases.

Our crude oil marketing segment spending levels were consistent during 2013 and 2014 and were backed by crude oil prices remaining strong, in the $90 – $100 per barrel range. In late 2014, crude oil prices fell and we curtailed spending during 2015, 2016 and 2017.

In our transportation segment, 2013 was stable with an increase in expenditures in 2014 to add capacity tracking with the petrochemical industry expansion efforts. However, in late 2015 and continuing into 2016 and 2017, demand for truck services weakened. The major project for 2016 was improvements to the existing Houston terminal facility. We are seeing increased demand in our transportation segment in 2017 and have plans to grow this segment in 2017.

We exited the crude oil and natural gas exploration and production business with the bankruptcy filing and subsequent sale of our crude oil and natural gas assets. We currently do not have any plans to pursue additional medical-related investments.



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Table of Contents


Other Items

Contractual Obligations

The following table summarizes our significant contractual obligations at December 31, 2017 (in thousands):
 
 
 
Payments due by period
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
 
 
 
 
 
 
 
 
 
 
Capital lease obligations (1)
$
1,847

 
$
398

 
$
796

 
$
653

 
$

Operating lease obligations (2)
3,407

 
2,758

 
531

 
95

 
23

Purchase obligations (3)
123,238

 
123,238

 

 

 

Total contractual obligations
$
128,492

 
$
126,394

 
$
1,327

 
$
748

 
$
23

___________________
(1)
Amounts represent our principal contractual commitments, including interest, outstanding under capital leases we entered into during 2017 for certain tractors in our marketing segment.
(2)
Amounts represent rental obligations under non-cancelable operating leases and terminal arrangements with terms in excess of one year.
(3)
Amount represents commitments to purchase certain quantities of crude oil substantially in January 2018 in connection with our crude oil marketing activities. These commodity purchase obligations are the basis for commodity sales, which generate the cash flow necessary to meet such purchase obligations.

In January 2018, we entered into a new lease agreement with a seven year term for storage tanks and other related assets in the Port of Victoria area of Texas in our crude oil marketing segment. Annual commitments for the years ended December 31, 2018 through 2025 will be approximately $1.5 million per year, for a total of approximately $10.1 million.

We maintain certain lease arrangements with independent truck owner-operators for use of their equipment and driver services on a month-to-month basis. In addition, we enter into office space and certain lease and terminal access contracts in order to provide tank storage and dock access for our crude oil marketing business. These storage and access contracts require certain minimum monthly payments for the term of the contracts. Rental expense was as follows for the periods indicated (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Rental expense
$
12,073

 
$
11,314

 
$
11,168


Insurance

Our primary insurance needs are workers’ compensation, automobile and umbrella liability coverage for our trucking fleet and medical insurance for our employees. Insurance costs were as follows for the periods indicated (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Insurance costs
$
10,438

 
$
13,330

 
$
15,570


Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably expected to have a material current or future effect on our financial position, results of operations or cash flows.

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Table of Contents


Related Party Transactions

For information regarding our related party transactions, see Note 9 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.

Recent Accounting Developments

For information regarding recent accounting developments, see Note 2 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.


Outlook

We took various steps to streamline our business in 2017, which we anticipate will lead to increased margins in both of our core segments during 2018. Our focus in 2018 will be on expanding our core businesses and working on strategic business development. In spite of recovering crude oil prices and increased production in our crude oil gathering and marketing core areas, margins remain tight. Competition with peers and with pipeline direct connects to lease production remains challenging.

Our major objectives for 2018 are as follows:

Marketing – We will have a focus on increasing margins to maximize cash flow, capturing midstream opportunities associated with increasing rig counts, drilling and completion activity in the U.S.

Transportation – We plan to increase truck utilization, upgrade fleet quality and enhance driver retention and recruitment. The transportation segment is uniquely positioned to take advantage of major downstream infrastructure projects that are taking place across the Gulf Coast.

Strategic business development – We will deploy a disciplined investment approach to growth in our two core segments and funding new growth opportunities that are adjacent and complimentary to existing operating activities.

    
Critical Accounting Policies and Estimates

In our financial reporting processes, we employ methods, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our financial statements.  These methods, estimates and assumptions also affect the reported amounts of revenues and expenses for each reporting period.  Investors should be aware that actual results could differ from these estimates if the underlying assumptions prove to be incorrect.  The following sections discuss the use of estimates within our critical accounting policies and estimates.

Fair Value Accounting

We enter into certain forward commodity contracts that are required to be recorded at fair value, and these contracts are recorded as either an asset or liability measured at its fair value. Changes in fair value are recognized immediately in earnings unless the derivatives qualify for, and we elect, cash flow hedge accounting. We had no contracts designated for hedge accounting during the years ended December 31, 2017, 2016 and 2015.


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Table of Contents


We utilize a market approach to valuing our commodity contracts. On a contract by contract, forward month by forward month basis, we obtain observable market data for valuing our contracts that typically have durations of less than 18 months. At December 31, 2017, all of our market value measurements were based on inputs based on observable market data (Level 2 inputs). See discussion under “Fair Value Measurements” in Note 10 to the Consolidated Financial Statements.

Our fair value contracts give rise to market risk, which represents the potential loss that may result from a change in the market value of a particular commitment. We monitor and manage our exposure to market risk to ensure compliance with our risk management policies. These risk management policies are regularly assessed to ensure their appropriateness given our objectives, strategies and current market conditions.

Trade Accounts and Allowance for Doubtful Accounts

Our trade accounts receivable has high volume and complexity of transactions and a high degree of interdependence with third parties. We manage our receivables by participating in a monthly settlement process with each of our counterparties. Ongoing account balances are monitored monthly, and we attempt to gain the cooperation of our counterparties to reconcile outstanding balances. We also place great emphasis on collecting cash balances due and paying only bonafide and properly supported claims. In addition, we maintain and monitor our bad debt allowance. We perform credit evaluations of our customers and grant credit based on past payment history, financial conditions and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based on specific situations and overall industry conditions. However, a degree of risk remains due to the custom and practices of the industry. See Note 2 in the Notes to Consolidated Financial Statements for further information.

Liability and Contingency Accruals

From time to time as incidental to our operations, we become involved in various accidents, lawsuits and/or disputes. As an operator of an extensive trucking fleet, we are a party to motor vehicle accidents, worker compensation claims or other items of general liability as are typical for the industry. In addition, we have extensive operations that must comply with a wide variety of tax laws, environmental laws and labor laws, among others. Should an incident occur, we evaluate the claim based on its nature, the facts and circumstances and the applicability of insurance coverage. When our assessment indicates that it is probable that a liability has occurred and the amount of the liability can be reasonably estimated, we make appropriate accruals or disclosure. We base our estimates on all known facts at the time and our assessment of the ultimate outcome, including consultation with external experts and counsel. We revise these estimates as additional information is obtained or resolution is achieved.

At December 31, 2017, we were not aware of any contingencies or liabilities that would have a material adverse effect on our financial position, results of operations or cash flows.

Revenue Recognition

Our crude oil marketing customers are invoiced monthly based on contractually agreed upon terms. Revenue is recognized in the month in which the physical product is delivered to the customer. Where required, we also recognize fair value or mark-to-market gains and losses related to its commodity activities. See discussion under “Revenue Recognition” in Note 2 to the Consolidated Financial Statements. Transportation segment customers are invoiced, and the related revenue is recognized as the service is provided.

See Note 2 in the Notes to Consolidated Financial Statements for a discussion regarding our adoption on January 1, 2018 of the new accounting standard related to revenue recognition.



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Table of Contents


Item 7A. Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, we are exposed to certain risks, including changes in interest rates and commodity prices.

Commodity Price Risk

Our major market risk exposure is in the pricing applicable to our marketing and production of crude oil and natural gas. Realized pricing is primarily driven by the prevailing spot prices applicable to crude oil and natural gas. Commodity price risk in our marketing operations represents the potential loss that may result from a change in the market value of an asset or a commitment. From time to time, we enter into forward contracts to minimize or hedge the impact of market fluctuations on our purchases of crude oil and natural gas. In each instance, we lock in a separate matching price support contract with a third party in order to minimize the risk of these financial instruments. Substantially all forward contracts fall within a six-month to eighteen-month term with no contracts extending longer than two years in duration.

Certain forward contracts are recorded at fair value, depending on our assessments of numerous accounting standards and positions that comply with GAAP in the U.S. The fair value of these contracts is reflected in the balance sheet as fair value assets and liabilities and any revaluation is recognized on a net basis in our results of operations (see Note 2 to the Consolidated Financial Statements for further information).

Historically, prices received for crude oil and natural gas sales have been volatile and unpredictable with price volatility expected to continue. From January 1, 2016 through December 31, 2017, our crude oil monthly average wholesale purchase costs ranged from an average low of $26.26 per barrel to a monthly average high of $60.16 per barrel during the same period. A hypothetical ten percent additional adverse change in average hydrocarbon prices, assuming no changes in volume levels, would have reduced earnings by approximately $1.2 million and $1.6 million for the years ended December 31, 2017 and 2016, respectively.

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Item 8. Financial Statements and Supplementary Data.



ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page No.
Reports of Independent Registered Public Accounting Firms
 
 
Consolidated Balance Sheets as of December 31, 2017 and 2016
 
 
Consolidated Statements of Operations
for the Years Ended December 31, 2017, 2016 and 2015
 
 
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2017, 2016 and 2015
 
 
Consolidated Statements of Shareholders’ Equity
for the Years Ended December 31, 2017, 2016 and 2015
 
 
Notes to Consolidated Financial Statements
 
Note 1   – Organization and Basis of Presentation
Note 2   – Summary of Significant Accounting Policies
Note 3   – Subsidiary Bankruptcy, Deconsolidation and Sale
Note 4   – Prepayments and Other Current Assets
Note 5   – Property and Equipment
Note 6   – Cash Deposits and Other Assets
Note 7   – Investments in Unconsolidated Affiliates
Note 8   – Segment Reporting
Note 9   – Transactions with Affiliates
Note 10 – Derivative Instruments and Fair Value Measurements
Note 11 – Income Taxes
Note 12 – Supplemental Cash Flow Information
Note 13 – Commitments and Contingencies
Note 14 – Concentration of Credit Risk
Note 15 – Quarterly Financial Information (Unaudited)
Note 16 – Oil and Gas Producing Activities (Unaudited)


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Adams Resources & Energy, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Adams Resources & Energy, Inc. and subsidiaries (the “Company”) as of December 31, 2017, the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 12, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2017.

Houston, Texas
March 12, 2018



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Adams Resources & Energy, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheet of Adams Resources & Energy, Inc. and subsidiaries (the “Company”) as of December 31, 2016, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Adams Resources & Energy, Inc. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.


/s/ DELOITTE & TOUCHE LLP

Houston, Texas
March 31, 2017





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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
December 31,
 
 
2017
 
2016
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
109,393

 
$
87,342

Accounts receivable, net of allowance for doubtful
accounts of $303 and $225, respectively
 
121,353

 
87,162

Inventory
 
12,192

 
13,070

Derivative assets
 
166

 
112

Income tax receivable
 
1,317

 
2,735

Prepayments and other current assets
 
1,264

 
2,097

Total current assets
 
245,685

 
192,518

Property and equipment, net
 
29,362

 
46,325

Investments in unconsolidated affiliates
 
425

 
2,500

Cash deposits and other assets
 
7,232

 
5,529

Total assets
 
$
282,704

 
$
246,872

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
124,706

 
$
79,897

Accounts payable – related party
 
5

 
53

Derivative liabilities
 
145

 
64

Current portion of capital lease obligations
 
338

 

Other current liabilities
 
4,404

 
6,060

Total current liabilities
 
129,598

 
86,074

Other long-term liabilities:
 
 
 
 
Asset retirement obligations
 
1,273

 
2,329

Capital lease obligations
 
1,351

 

Deferred taxes and other liabilities
 
3,363

 
7,157

Total liabilities
 
135,585

 
95,560

 
 
 
 
 
Commitments and contingencies (Note 13)
 

 

 
 
 
 
 
Shareholders’ equity:
 
 
 
 
Preferred stock – $1.00 par value, 960,000 shares
authorized, none outstanding
 

 

Common stock – $0.10 par value, 7,500,000 shares
authorized, 4,217,596 shares outstanding
 
422

 
422

Contributed capital
 
11,693

 
11,693

Retained earnings
 
135,004

 
139,197

Total shareholders’ equity
 
147,119

 
151,312

Total liabilities and shareholders’ equity
 
$
282,704


$
246,872


See Notes to Consolidated Financial Statements.

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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Revenues:
 
 
 
 
 
 
Marketing
 
$
1,267,275

 
$
1,043,775

 
$
1,875,885

Transportation
 
53,358

 
52,355

 
63,331

Oil and natural gas
 
1,427

 
3,410

 
5,063

Total revenues
 
1,322,060

 
1,099,540

 
1,944,279

 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
Marketing
 
1,247,763

 
1,016,733

 
1,841,893

Transportation
 
48,538

 
45,154

 
52,076

Oil and natural gas
 
948

 
2,084

 
6,931

Oil and natural gas property impairments
 
3

 
313

 
12,082

General and administrative
 
9,707

 
10,410

 
9,939

Depreciation, depletion and amortization
 
13,599

 
18,792

 
23,717

Total costs and expenses
 
1,320,558

 
1,093,486

 
1,946,638

 
 
 
 
 
 
 
Operating earnings (losses)
 
1,502

 
6,054

 
(2,359
)
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
Loss on deconsolidation of subsidiary (Note 3)
 
(3,505
)
 

 

Impairment of investment in unconsolidated affiliate
 
(2,500
)
 

 

Interest income
 
1,103

 
582

 
327

Interest expense
 
(27
)
 
(2
)
 
(13
)
Total other income (expense), net
 
(4,929
)
 
580

 
314

 
 
 
 
 
 
 
(Losses) earnings before income taxes and investment
 
 
 
 
 
 
in unconsolidated affiliate
 
(3,427
)
 
6,634

 
(2,045
)
 
 
 
 
 
 
 
Income tax (provision) benefit:
 
 
 
 
 
 
Current
 
(895
)
 
(2,778
)
 
(4,073
)
Deferred
 
3,840

 
87

 
4,843

Income tax benefit (provision)
 
2,945

 
(2,691
)
 
770

 
 
 
 
 
 
 
Earnings (losses) from continuing operations
 
(482
)
 
3,943

 
(1,275
)
Losses from investment in unconsolidated affiliate, net of
 
 
 
 
 
 
tax benefit of $—, $770 and $—, respectively
 

 
(1,430
)
 

Net (losses) earnings
 
$
(482
)
 
$
2,513

 
$
(1,275
)
 
 
 
 
 
 
 
Earnings (losses) per share:
 
 
 
 
 
 
From continuing operations
 
$
(0.11
)
 
$
0.94

 
$
(0.30
)
From investment in unconsolidated affiliate
 

 
(0.34
)
 

Basic and diluted net (losses) earnings per common share
 
$
(0.11
)
 
$
0.60

 
$
(0.30
)
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
4,218